Hypothetical Mean

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Archive for June 2009

Budget Arbritrage Strikes Healthcare Reform

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In December, the CBO gave Congress a buffet-like price list on how to pay for healthcare reform.  The likely result of that approach is that lawmakers would comb through the CBO options, find those that were based on the flimsiest assumptions and/or that were fundamentally mis-estimated.  I believe that has happened with healthcare reform, and there’s some evidence from Arkansas’ own Senator Blanche Lincoln.

“Everything’s on the table,” Lincoln is quoted as saying in today’s Arkansas Democrat-Gazette.  She suggests that she might support taxing healthcare benefits, but only at a level that “would certainly be way above anything that your average Arkansan is paying for health care — if it occurs at all.”  Implicitly she’s arguing that the hundreds of billions of revenue that the CBO estimates will flow from taxing healthcare benefits greater than $17,000 or $20,000 per employee may not “occur at all” … yet it appears to be on the table as one way the plan can be “paid for”.

I’d call this the “strong form” of budget arbitrage.  Specifically, budget arbitrate can happen simply because of the uncertainty of the estimates; in such cases, however, the uncertainty could go either way.  Let’s call that the “weak form”.  In the “strong” form, Congressmen specifically “select” against the CBO in a non-deficit neutral way.  The bill will appear to be “paid for”, but the needed revenue offsets fail to appear.  That may be what is happening here.

Specifically, I suspect the CBO models are failing on at least one of two dimensions with respect to this particular revenue proposal.

1) We don’t know exactly who is paying more than $17,000 per year today.  This uncertainty is emphasized by a recent paper by Gould and Minicozzi.  Note that this paper was published this year, after the CBO options were presented in December, 2008.  They hypothesize and show some evidence in support of the notion that the people paying these high premiums are disproportionately sicker, older, and in smaller groups in high cost areas, perhaps in areas that also have relatively limited rate regulation.  Under Healthcare Reform, will those high rates continue to exist, or will those high cost individuals enjoy subsidization from the rest of us?  If their premiums get lowered, there may not be any tax revenue there at all.  And if they don’t, you have to wonder whether healthcare reform is worth doing.

2) We don’t know how those offering and buying those plans will adjust to the taxation of their “excess” benefits.  Even if healthcare reform doesn’t lower premiums for the sickest and costliest among us in the small group market (as per my previous point), these firms might change their behavior and simply lower the value of their benefits to avoid taxation.  As an outsider, I suspect that this sort of dynamic response may not be fully incorporated into the CBO’s models.

These are just educated guesses.  Alex Minicozzi is one of the 50 economists working at the CBO on healthcare reform, and she’s the coauthor mentioned in the aforementioned paper.  So the core intellectual base is there in the CBO to minimize the damage from this situation.  On the other hand, these models are very complicated and take considerable time to evolve.  And I’m just not sure anyone could accurately reflect what will happen to “high tail” health premiums.  This smells a lot like Bush I’s luxury taxes that raised very little revenue.

Lincoln is smelling the same thing, apparently.  Let’s see if she’ll consider this a valid option to “pay for” reform.

Written by Victor

June 28, 2009 at 8:55 pm

Chronic Care in Healthcare Reform Insurance

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Frank Pasquale at Concurring Opinions argues in favor of the so-called Public Option partly because he believes it is needed to provide care for the chronically sick but insureds.  This may be true, but it is only true because the Exchange, by commoditizing insurance and encouraging annual elections, will weaken the effectiveness and incentives currently in the marketplace.

Currently, almost all, if not all, individual insurance is “guaranteed renewable”.  That means that as long as the customer continues to pay premiums, the insurance company is on the hook for medical expenditures, regardless of changes in the insured’s health status.  Insurers also do not rate for any single person’s condition; rather, they pool risk in various methods as required by the various states.

In practice what this means is that the chronically ill, once they obtain insurance, can stay on the particular health plan for the remainder of their lives.  This stability is ironically reinforced by the fact that switching to another carrier would require that they go through underwriting.

The net impact of these restrictions is a many-year or possibly lifetime commitment from the insurance company to the insureds who purchase individual insurance from them. The observed explosion in large case management, utilization and case review, disease management, health education and other programs is the logical result of this multiyear commitment.  Group insurance also has seen this explosion caused because of a similar multi-year commitment on the part of employers to the health of their workers.

Almost all healthcare reforms proposed today are designed to weaken multi-year insurance, along with the value of these programs to the insurance companies.  Specifically, the nature of the “Exchange” coupled with guaranteed issue restrictions means that sick individuals will be much more likely to shop.  In fact, most financial advisors will likely recommend a “stair-step” approach to Exchange insurance: buy the slimmest available plan as long as you are healthy and save the difference; this includes possibly avoiding the Exchange altogether (either via a grandfathered plan or an employer plan).  Once you get sick, switch to a rich Exchange plan.

Increased “benefit ratio” regulation will further decrease the incentives to private payers to continue to pay for costly management of chronic conditions, except to meet whatever narrow “quality” benchmarks are required.  The “quality” benchmarks will also likely only target prevalent conditions, meaning those will become the focus of management  in contrast to overall cost efficiency which is incented today (for carriers who are selling new issues or renewals and therefore want to keep premiums low).

My ideal healthcare reform approach would value and encourage multiyear commitments from healthcare financing companies to their members.  I see the Exchange as weakening that objective.  I find it especially odd to argue that a Public plan is necessary to accomplish that which is being discouraged elsewhere in the reform proposals.

Frank’s also concerned about plans being opaque.  I am not; at least I wouldn’t rate it as one of the top two or three issues for a public plan or healthcare reform to address.  Doctors voluntarily contract with insurers.  If an insurer becomes too cumbersome, they should refuse patients from that financing organization, or seek employment in an integrated delivery system where they don’t have to worry about that at all.  I’ll also note the irony in this criticism, since the main reason why payments are so “opaque” today is the absolute mish-mash that our beloved government has made of healthcare coding.  But that’s a post for another day.

Written by Victor

June 28, 2009 at 8:10 pm

Posted in Healthcare Reform

Estimating the Cost of Healthcare Reform: Round 1, the Kennedy Bill

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The CBO has issued a preliminary analysis of the Kennedy healthcare reform plan.  The following points are useful in understanding the estimates.

1) 30% of the direct cost is assumed to be offset by increased wages from reduced healthcare coverage.  About 14 million people who would be covered by their employer under current law will not have employer based coverage under the Kennedy bill.  The CBO believes that their wages will rise to maintain competitive compensation.  I think this is a bad assumption for budgeting purposes.

  • It is highly uncertain and therefore an example of budget arbitrage, although it comes from within the CBO itself.
  • 10 of the 14 million will voluntarily decline coverage that is offered to them.  It is not plausible that those individuals will receive additional compensation.  We can’t know for sure if the $257b in increased revenues over six years comes from wage increases on just the remaining 4 million individuals.
  • Pricing the value of health insurance as a “compensating differential” is difficult.  I would suggest that many of the current features of employer based health insurance are poorly understood in such a model, thereby casting doubt on the validity of using that approach to project future revenues.
  • I am concerned about long-run slack in the labor market and “paying” for healthcare reform by assuming that employees are in a strong negotiating position may not be prudent.

2) The direct cost of this bill was surprisingly low.  Premium subsidies were granted to those with incomes of more than $110,000 for a family of four.  Presumably, these subsidies must grow with healthcare costs.  We don’t know the assumed growth rate in those costs.  Also remember that these subsidies must make relatively rich federally-defined plans affordable.  The CBO assumes that the subsidies will be effective at doing this, causing 10 million people to decline their current employer-based coverage.  Much of the increase in healthcare costs in 2013-2015 will be due to this legislation and the corresponding stress on our health care delivery system.  I therefore want to see more specifics on the average size of the subsidy.

3) The “clawbacks” within this approach are going to be a significant deterrent to work.  I don’t see this effect estimated.  To illustrate, let’s assume that a family of four earning $40,000 in 2014 gets free healthcare insurance (not free healthcare since there is cost-sharing in the federal plans).  Let’s also assume full-phase out of the subsidy by a $120,000 income.  This subsidy is likely worth something on the order of $15,000-20,000 (for the entire family; again in 2014).  This means that any increase in pay between $40,000 and $120,000 will result in an effective 18%-25% tax as the subsidy is gradually withdrawn.  This feature also has the possibility of significantly affecting family structures, the desirability of two-earner households, and the willingness to save and invest for the future.

I am opposed to the Kennedy bill for many reasons, include some expressed by Keith Hennessey.  I find this cost estimate unfortunate not because of the low price tag but because I believe the assumptions and modeling structure to be very, very optimistic running real fiscal risks.  I hope these issues and others are fixed before final scoring.

Written by Victor

June 16, 2009 at 11:26 am

Would paying for a Honda Civic drive you to Bankruptcy?

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If the answer is “yes”, then this latest study on medical bankruptcies applies to you.

The authors argue that medical bills as low as 10% of your pretax may be driving up to 62% of all bankruptcies.  Is that personal financial mismanagement or is that a sign of a broken healthcare system?

Out of pocket medical expenditures averaged less than $18,000 for insured families.  This is less than the interest owed on a $300,000 mortgage at 6%.  It is also larger than most out of pocket maximums associated with health plans I’m familiar with, although you could accrue that much over multiple years of exposure.

I suspect that what is going on here is that many of these individuals have had a significant non-medical financial shock and they are loading as many medical bills into their bankruptcy filings as possible, as they should.  The researchers are going back in after the fact and citing the medical bills as the proximate cause for the filing.

Another subset may have had a disabling injury, forcing them to quit their jobs.  I would rank disability insurance as the second most important form of insurance you can have (next to life insurance).  A 30 year old who becomes disabled loses the vast majority of her lifetime earning power, worth millions.  That dwarfs the cost of a Honda Civic and also dwarfs the risk associated with all but the absolute rarest and most extreme medical expenses.

Written by Victor

June 4, 2009 at 3:21 pm

Defining “Budget Arbitrage”

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Budget Arbitrage — n. the act of “paying for” relatively certain short-term spending proposals by “reducing” highly uncertain longer-term spending.  Budget arbitrage takes advantage of the fact that CBO scoring does not risk-adjust scored spending based upon the likelihood that the underlying assumptions are accurate.

Budget arbitrage is the natural result of a political process that attempts to find the politically least costly method of “paying for” current spending.  The more uncertain the estimate of the future, the less likely there will be political opposition to the future cut.  In contrast, the more certain the short-term spending is, the more certain is the short-term political gain.

One classic example was HR6331, where an increase in physician payments beginning immediately (July 1, 2008) were “paid for”, in part, by asserting a network requirement on Medicare Advantage providers.  This network requirement was estimated to reduce the attractiveness of Medicare Advantage and, therefore, reduce enrollment and corresponding costs to CMS.  This requirement is to become effective on January 1, 2011, 43 months after the increased expenditures were to begin.  This was estimated to save substantial sums of money despite the possibility that many Medicare Advantage providers might move their membership from FFS plans, regardless.  If that would have happened the deficit would have been lower and Congress would have had to find alternative means to fund the short-term and immediate spending increases.

The net effect of “paying for” the physician fee increase was to increase the short-term deficit and potentially increase the long-term deficit, as well.

Notably, the Medicare Advantage “cuts” in the bill were estimated to more than pay for the short-term physician fee increases.  Rather than “apply” the estimated excess to future deficit reduction, the difference was “spent” in a “Medicare Improvement Fund” that would accumulate significant funds.  In that manner a highly uncertain savings estimate for the years 2014-2017 was transformed into a guaranteed source of future revenues in case additional spending is desired in future Congresses.  This is true regardless of whether or not 2011 Medicare Advantage enrollment validates or invalidates the estimates used by the CBO in 2008.

A summary of HR6331 is here.

Written by Victor

June 3, 2009 at 11:01 pm